The world of investing is always volatile. But did you know that by deeply looking into the past, you can predict the future? This is a point emphasized by Morgan Housel, a partner at Collaborative Fund and a well-known author. In his book “Same as Ever: A Guide to What Never Change”, he argues that by analyzing past events, one can foresee what might happen next.
Repeating Patterns in the Stock Market
Looking back at history, one can see that many major events tend to repeat over time. Housel warns that investors might be sowing the seeds of the next bear market right now. In fact, a 20% market drop happens approximately every three years. This is a cyclical phenomenon, and it is crucial for investors to recognize and prepare for it.
- 1999 and 2007: Tech bubble and financial crisis
- 2019: Global economic uncertainty
Housel emphasizes the importance of understanding these cycles. For instance, while the market drop due to the COVID-19 pandemic in 2020 was hard to predict, past patterns could have helped investors be better prepared.
Market Valuations and the Power of Narratives
Morgan Housel says that when investors are confident that the market won’t crash, that is often when it is most likely to do so. This is because high valuations often trigger the final crash. He explains that in the stock market, “the value of every company is simply today’s numbers multiplied by tomorrow’s stories”.
The power of narratives significantly influences investor psychology. If people are pessimistic about the future, their stories will be pessimistic, and if they are optimistic, they are willing to pay higher prices. This helps us better understand market movements.
- Understanding past patterns
- Understanding the relationship between valuation and narratives
- Preparing for cyclical market fluctuations
The Impact of Unpredictable Events
Over the past 20 years, the most significant financial and economic events were the 9/11 attacks and the 2008 financial crisis. These events were unpredictable, yet they had a massive impact on the market. Unpredictable events wield the most powerful force in all business and investment activities.
Housel quotes Charlie Munger, Warren Buffett’s partner, saying, “The first rule of a happy life is to lower your expectations”. This can also apply to investing. Excessively high expectations can be the root of economic anxiety and investment problems.
The Importance of Investment Strategy
Morgan Housel sticks to a strategy of only investing in index funds. He explains that this is akin to betting on global capitalism. It is more stable and offers long-term growth compared to investing in specific companies or industries.
The most dangerous time for investors is when everything looks great. Looking back at history, the most dangerous periods in the market were 1999, 2007, and 2019, all of which were on the brink of massive declines. Conversely, the best opportunities were in 2002, 2009, and 2020, when fear was rampant.
Conclusion
Looking back at the past plays a crucial role in predicting the future. As Housel says, the time when the market seems calm is often when the seeds of the next downturn are being planted. Recognizing and preparing for this is key to a successful investment strategy. By understanding past patterns, you too can prepare for the future. This is an essential lesson that can be applied not only to investing but to all areas of life.
Reference: Think Advisor, “Morgan Housel: To See Crashes Coming, Look Backward”